1. Creation Of A Surplus

As we have seen, the resources of a bank of discount and deposit are : first, the capital, which is contributed by the shareholders; second, the surplus, which is a portion of the net earnings that are set aside to make good any losses that may occur. These are inevitable, and if a bank divided all of its profits annually or oftener, then, when losses occurred, there might be an impairment of the capital, especially if a large loss should occur just after the division of the profits. It would be awkward to ask the shareholders to make the loss good; it would not be prudent for the government to give the bank time to make up the loss from prospective profits, for these might not be earned; the government could indeed require the bank to reduce its capital to a figure corresponding with the amount left, and this is sometimes done. A much easier way for a bank is to accumulate a surplus to meet these unhappy, but inevita ble, events. Unless they are so large as to sweep away all the surplus, a bank's solvency is in no way affected by them. Sometimes, however, they are so large that all the surplus and all the capital arc lost, and even more.

The national banking law requires every bank to set aside one tenth of its net earnings until it has accumulated a surplus fund equal to twenty per cent of its capital.

If at any time this becomes impaired, the bank must begin to build anew in the: same manner as before until the amount reaches the legal height. Many banks have a surplus much larger than their entire capital. Thus the First National Bank of New York has a capital of &10,000,000 and a surplus of $12,219,900, while the Chemical National Bank of New York, with a capital of only $300,000, has accumulated a surplus of $7,240,700.1

Some banks invest their surplus in securities that are not appraised at their entire worth. One object of doing this is, should a large loss occur, to restore the amount of the surplus fund by marking up the value of their securities. Thus in 1900 the First National Bank of New York sustained a loss of nearly $700,000, but the sum credited to the surplus fund was not diminished, because the real value of securities composing it was fully that amount. Of course every bank is poorer to the extent of a loss sustained, but it may be no poorer, so far as public knowledge goes, if there be a secret reserve or surplus fund of which the public has no knowledge - large enough to make up its losses. This is by no means an uncommon practice with banks, to create a fund unknown to the public in order to be doubly prepared for such events, which the wisest banker can not wholly prevent.

Some banks keep their surplus fund under this name; others, under the name of undivided profits. Again, a third class of banks divide their surplus, keeping a part under one head and the remainder under the other.

The third item of resources consists of notes, and the last of deposits. Both of these items have Been considered. The profits of a bank consist in lending its resources, and we will now proceed to explain how this is done.